Dell to Go Private in $24.4 Billion Deal That Includes Microsoft

Dell to Go Private in $24.4 Billion Deal That Includes Microsoft

Dell executives are taking the world's third-largest PC maker private, after weeks of speculation, in an effort to enable it to ramp up their efforts to transform the company.

Dell made the announcement Feb. 5, after the company's board of directors reportedly approved the deal in a meeting the night before. In the largest leveraged buyout since before the global recession hit in 2008, Dell stockholders would get $13.65 in cash for each share of Dell common stock, about a 25 percent increase from the company's closing share price on Jan. 11 of $10.88.

The board of directors voted on the recommendation of a special committee put together to oversee the process. The deal is valued at about $24.4 billion, according to the company, and still needs to go to a vote among unaffiliated stockholders.

Under the deal, founder and CEO Michael Dell and investment firm Silver Lake Partners will buy Dell. Included in the consortium that is buying Dell is Microsoft. Michael Dell, who already owned 14 percent of Dell, is expected to invest more of his personal fortune and via his investment firm, MSD Capital, to retain control of the company. Silver Lake will put in $1 billion, while Microsoft will lend another $2 billion, according to reports.

Debt financing will come from BofA Merrill Lynch, Barclays, Credit Suisse and RBC Capital Markets, and cash on hand, according to Dell. The deal is expected to close before the end of Dell's fiscal 2014 second quarter.

Michael Dell first approached the board of directors in August 2012 with the idea of taking the company private, according to the Dell statement. The special committee was formed after that, with Alex Mandl serving as lead director. The committee got financial, strategic and legal advice from J.P. Morgan and Debevoise & Plimpton, and received an independent analysis from "a leading management consulting firm," and later hired Evercore Partners for more advice.

"I believe this transaction will open an exciting new chapter for Dell, our customers and team members," Michael Dell said in a statement. "We can deliver immediate value to stockholders, while we continue the execution of our long-term strategy and focus on delivering best-in-class solutions to our customers as a private enterprise. Dell has made solid progress executing this strategy over the past four years, but we recognize that it will still take more time, investment and patience, and I believe our efforts will be better supported by partnering with Silver Lake in our shared vision.

"I am committed to this journey and I have put a substantial amount of my own capital at risk, together with Silver Lake, a world-class investor with an outstanding reputation. We are committed to delivering an unmatched customer experience and excited to pursue the path ahead," he continued.

Included in the deal is a "go-shop" period, where the special committee and Evercore Partners can consider offers from other groups or organizations interested in buying Dell. The initial go-shop period will last 45 days; there is a provision for another 45 days after that to allow the special committee to continue discussions with other bidders, enter into a transaction or recommend other proposals. Any other groups that make a qualifying proposal during the initial 45-day period would have to pay $180 million if that deal is terminated, according to Dell's statement.

Dell to Go Private in $24.4 Billion Deal That Includes Microsoft

For bidders who did not qualify during the initial go-shop period, the termination fee would be $450 million.

Like other companies with tight ties to the PC space, Dell has been significantly impacted by the weakening global PC market. In addition, like those other companies—including Hewlett-Packard, the world's number-one PC vendor, and chip makers Intel and Advanced Micro Devices—Dell over the past few years has been working to transform itself from primarily a PC and server maker to an enterprise IT solutions provider.

Through in-house development and acquisitions—of companies such as Perot Systems (services), Compellent and EqualLogic (storage), Force10 Networks (data center networking) and SonicWall (security)—Dell has been working to build up its data center capabilities. Dell has sought to integrate these dozen-plus acquisitions into the company, but the company is still being dragged down by its legacy PC business.

Analysts with Gartner said that worldwide PC shipments in the fourth quarter of 2012 fell 4.9 percent from the same period in 2011, and that during the same period, Dell PC shipments dropped 20.9 percent.

Analysts generally have given Dell credit for the efforts that its executives have made to transform the company, but have added that it will continue to be an arduous journey. A key idea behind taking Dell private is that executives will be able to accelerate their transformation efforts outside of the glare of Wall Street and financial analysts and the pressure of quarterly financial reports.

"You don't have to worry about the market scaring away investors," Charles King, principle analyst at Pund-IT Research, told eWEEK in January after reports about the effort to take Dell private began to circulate. "That's been a killer to a number of technology companies for quite a while. ... By taking yourself off the tablet of financial industry analysts and headlines, you get out of the hype cycle and just continue doing what you're doing and making money for shareholders."

What Dell is trying to do right now—from reducing complexity within the organization, to merging the various companies they've acquired, to developing a strong, coherent strategy moving forward—is difficult for any company, and even more so as a public company, according to Forrester Research analyst David Johnson. Trying to transform like Dell is doing is difficult when executives also have to worry about growing the various lines of business inside the company, particularly given the large number of acquisitions, Johnson said in a Feb. 5 blog post.

Dell to Go Private in $24.4 Billion Deal That Includes Microsoft

Throw in the various regulations that public companies need to keep up with—particularly Sarbanes-Oxley—and the idea of taking the company private makes sense, he wrote.

"I think what private equity means for Dell is that they can get out from under the regulatory burden, and Michael Dell can make the kinds of changes he needs to redirect the company focus," Johnson wrote. "The departure of their Chief Strategy Officer David Johnson (my namesake, apparently) a few weeks ago signals that a major strategy shift is in the works. "IT has only grown more complex. Very few companies are in the business of simplifying it in dramatic ways. Apple is one. Most others are just applying band-aids to a bursting pinata.

"Dell's opportunity is to double-down on simple and astoundingly innovative solutions to complex problems with a level of quality, excellence and speed that their still-hobbled public competitors can't match," Johnson wrote.

Microsoft also has an interest in keeping Dell healthy. Microsoft's software is found in most PCs on the market, but like other established tech vendors, it still doesn't have a strong presence in the booming mobile device market, particularly in smartphones and tablets. Microsoft, like Dell, has a keen interest in seeing a healthy PC market, while a strong Dell also could give it an even greater presence in such areas as cloud and virtualization.

Reports had circulated in recent weeks that Microsoft's possible involvement had created a snag in the negotiations, with discussions centering on the amount of control Microsoft would have over the operations at Dell. Those issues apparently have been resolved.

According to Forrester's Johnson, Microsoft also is looking for an enterprise channel for its in-house hardware, and tighter integration between the hardware and Windows operating system could help boost Microsoft's cloud capabilities, thanks to such benefits as performance optimization and better resource automation.

"Microsoft needs more supply chain expertise and capacity for PC hardware, and needs more dedicated focus from an OEM like Dell to execute on a strategy of better integration between the operating system and hardware—both on the desktop and in the data center," he wrote.